Monday 21 December 2009
The Truth About Money
Everyone should have a 'Life Plan'....Talk to your Financial Planner for Professional Impartial Financial Planning Advice - everyone should get the 'The Truth About Money'.
Friday 18 December 2009
A dozen tax tips for the 12 days of Christmas
Traditionally Christmas is a time to relax, but it is also an ideal opportunity to use any downtime to discuss pension planning in advance of the tax year-end, coupled with the popular company year-end of 31 March. With this in mind, here are 12 suggestions for clients to increase their retirement savings.
1. Maximise pension contributions while you can
The maximum tax relievable personal contribution to a pension plan is 100% of relevant UK earnings or £3,600, whichever is the higher. If you have had the misfortune of having your job made redundant recently, it makes sense to contribute to a pension plan before the end of the tax year.
Many individuals consider investing some of their redundancy payment, especially any amount over the first (tax-free) £30,000. If a redundancy payment greater than £30,000 is received and added to 2009-10 income earned before redundancy, higher rate tax may be due on a considerable amount of money.
However, earnings for 2010-11 could be far lower or even nil, in which case the contribution would be limited to £3,600. Those wanting to obtain higher rate tax relief may need to contribute before the end of the tax year.
2. Salary exchange (not sacrifice)
In the past, it has sometimes been difficult to gain employees’ support for this idea because ‘sacrifice’ implies something is being given up or lost. This is not the case: an exchange is taking place, value is not lost, and it is important this is realised.
A reduction in earnings means a reduction in national insurance (NI) payments and these savings can be used to provide benefits in a number of ways. If the employee and employer NI savings are added, the employer pension contribution could be up to 31% higher than receiving the salary and paying a personal contribution.
For higher rate taxpayers who opt for salary exchange, the increase in contribution would be lower (14.7%) but there would be the added benefit of tax relief at source.
3. Use input periods
Key points to be aware of include:
*
All registered pension schemes have a pension input period.
*
The pension input during a pension input period is compared to the annual allowance for the tax year when the period ends.
*
In a money purchase scheme, the member may choose to end the pension input period less than 12 months after the start.
Case study
Mary runs her own business. A pension plan commences on 15 March 2010 with a £245,000 employer contribution. Mary nominates to end the input period on 19 March 2010. The contribution is tested against the annual allowance for the tax year in which the input period ends (2009-10).
Mary’s second pension input period starts on 20 March 2010 and on that day her employer contributes £255,000, which is tested against the annual allowance for 2010-11. Mary nominates to end this second input period on 6 April 2010 (there must only be one input period end per arrangement in each tax year).
The third input period starts on 7 April 2010 and ends on 7 April 2011 (in 2011-12). Any contribution paid between these dates is tested against the 2011-12 annual allowance. It is therefore possible for Mary’s employer to pay another contribution on 7 April 2010 of £255,000.
This means £245,000 is paid on 15 March 2010, £255,000 a few days later on 20 March and £255,000 on 7 April, a total of £755,000 of company contributions in a matter of days. (The contributions need to be acceptable to the local inspector as ‘wholly and exclusively’ for employer tax relief to be given).
Anti-forestalling effect
Contributions of this level will not necessarily make sense if relevant income is more than £150,000 because anti-forestalling will bring a special annual allowance charge and a hefty personal tax bill.
However, if relevant income is less than £150,000 in the current and previous two tax years, then the anti-forestalling regulations will not apply. But remember, relevant income includes investment income, not just earnings from employment.
4. Carry back trading losses
Where a company makes pension contributions, valuable corporation tax relief can be secured, even when they are made during a loss-making accounting period.
Where pension contributions are allowable as a deduction against corporation tax, any trading loss can be set against profits from the previous year and, following the 2008 pre-Budget report and 2009 Budget announcement, the two years preceding that year. The ‘carry back’ relief extension means a tax refund can be received earlier.
*
Claims are possible for companies making returns for accounting periods between 24 November 2008 and 23 November 2010.
*
Losses are offset against the preceding year first and the amount able to be carried back to the first preceding year is unlimited.
*
A maximum of £50,000 of the balance of any unused losses can be carried back to the two earlier years.
Trading losses may also be carried forward to set against future profits. As long as the company paid corporation tax in the previous three accounting periods or will be paying it in subsequent periods, tax relief will be applied to pension contributions provided they are made wholly and exclusively for the purposes of the trade.
Consider reviewing cases in which a trading loss has been made between these dates to ensure this valuable planning opportunity is not overlooked.
5. Claim higher rate tax relief
Personal contributions to pension plans are often paid out of net pay and grossed up by basic rate tax relief. For higher rate taxpayers, the difference between higher and basic rate relief is reclaimable when completing a self-assessment tax return.
The difference between higher rate and basic rate can be claimed by completing and returning a self-assessment tax return. If members do not do this, they may not receive the tax saving that is due.
6. Contribute at least £20,000 (this year and next)
It is a good idea to remind clients of the cost of delaying pension contributions and the possible effects on future retirement provision.
Case study
(For illustrative purposes, assume a growth rate of 7% each year and an annual management charge of 1%)
John has relevant income of £200,000 for 2009-10. He is aged 50 and intends to take his pension benefits at age 65.
If he paid £20,000 gross in 2009-10 and 2010-11, these contributions could be worth £92,260 at age 65. The effective cost would be £22,000 (£20,000 less 40% tax relief plus £20,000 less 50% tax relief).
If payment is deferred until 2011-12, then using the same assumptions, a contribution of £40,000 could be worth £84,588 at age 65. The cost to John would be £32,000 (£40,000 less 20% tax relief).
John’s choice is to pay a total of £22,000 net over 2009-10 and 2010-11, or pay nearly £35,000 net in 2011-12 to achieve the same potential fund value at age 65.
7. Third party contributions
This offers considerable scope for inheritance tax (IHT) and pension planning with the advantage that a donor can gift money in their lifetime without any possibility of IHT (subject to surviving seven years) while making pension provision for future generations.
The value of the gift is enhanced by basic rate tax credit when it is paid into the pension plan. The donor does not need to worry about beneficiaries frittering away the monies because access to the funds is not normally available until age 55.
8. Manage relevant income
Anti-forestalling introduced a relevant income threshold of £150,000 (and a special annual allowance of £20,000). Anyone with lower relevant income is not affected by the rule changes. But even if this year’s income is less than £150,000, it may have been higher in either of the previous two tax years.
Assuming that relevant income for all three years is less than £150,000, there are a number of pension planning issues and opportunities:
*
Salary exchange will continue to be attractive as a means of reducing tax and NI contributions, for those with relevant income of less than £150,000.
*
Maximise personal contributions. Anyone with relevant income of less than £150,000 can pay up to 100% of their relevant UK earnings and get tax relief at their highest marginal rate.
* Let the employer make the contribution. Contributions from an employer are not normally added back in to the calculation of relevant income. So it is possible for relevant income to remain below £150,000 and employer contributions to be paid up to the annual allowance or even beyond.
9. Retain your personal allowance in 2010-11
If adjusted net income is more than £100,000, the basic personal allowance will be reduced or removed entirely. A pound of personal allowance will be lost for every £2 of income earned over £100,000. All personal allowance will be lost when earnings equal approximately £112,950 (assuming the current personal allowance), giving an effective 60% tax rate.
Adjusted net income is taxable income reduced by specified deductions (such as trading losses and payments made gross to pension schemes) as well as grossed-up gift aid and pension contributions that have received tax relief at source. Provided an individual’s adjusted net income is not more than £100,000, they will continue to be entitled to the full amount of the basic personal allowance.
Making a personal pension contribution would reduce adjusted net income, which not only reduces the higher rate tax liability, but could also mean retaining the full personal allowance and effective tax relief of up to 60%.
10. Bed and Sipp
Approved share option plans can be rolled over on maturity into a pension arrangement and deliver a tax relief top-up. It may also be possible to encash other types of assets and securities, and invest the proceeds into a pension plan that offers access to a wide range of investments, such as a self-invested personal pension (Sipp).
Basic rate tax relief is added to the contribution (which may help to offset any losses) and the original investment can then be replicated as far as possible in the pension plan.
Sheltering investments in a tax-favoured wrapper, such as a pension plan or ISA, can even help to reduce relevant income and avoid the possibility of the anti-forestalling provisions biting.
11. Carry back of gift aid
The final step of calculating relevant income under anti-forestalling deducts gift aid contributions. Potentially, gift aid contributions could reduce relevant income to less than £150,000 and thereby result in not being affected by anti-forestalling.
A donation, subject to gift aid, can be backdated to a previous year if a nomination is made on the self-assessment tax return for that year, ie, before it is submitted to HM Revenue & Customs (HMRC) by either the 31 October deadline for a paper return or the 31 January deadline for an online return.
This means provided the 2008-09 tax return has not yet been submitted, a claim can still be made by 31 January 2010. HMRC Form P810 Tax Review can be used for those who do not submit a self-assessment tax return; the deadline is still 31 January 2010.
12. Income recycling
While the government’s position on recycling tax-free cash is well known, no similar action has been taken against recycling income.
The recycled income is invested in an uncrystallised pension arrangement, offering additional tax-free cash and improved lump sum death benefits, which are not subject to 35% tax or (normally) IHT.
Provided the income is reinvested immediately, all other things being equal, the total fund invested should remain the same as if no income were taken (the tax relief cancels out the income tax). However, higher rate taxpayers must be aware of the tax relief time lag. They will not have full fund replacement unless they replace the marginal higher rate tax up front from other resources before claiming the relief later.
Income recycling could be particularly useful to those who are aged 50 or over, but under 55 on 6 April 2010, who want to access their benefits before then, rather than wait up to another five years.
Recycling income into a third party’s pension is also a useful estate-planning tool. Unlike personal income recycling, this option is even possible after the age of 75, and could be useful planning for someone concerned about death while in alternatively secured pension.
Note: This was written before the 9 December pre-Budget report.
1. Maximise pension contributions while you can
The maximum tax relievable personal contribution to a pension plan is 100% of relevant UK earnings or £3,600, whichever is the higher. If you have had the misfortune of having your job made redundant recently, it makes sense to contribute to a pension plan before the end of the tax year.
Many individuals consider investing some of their redundancy payment, especially any amount over the first (tax-free) £30,000. If a redundancy payment greater than £30,000 is received and added to 2009-10 income earned before redundancy, higher rate tax may be due on a considerable amount of money.
However, earnings for 2010-11 could be far lower or even nil, in which case the contribution would be limited to £3,600. Those wanting to obtain higher rate tax relief may need to contribute before the end of the tax year.
2. Salary exchange (not sacrifice)
In the past, it has sometimes been difficult to gain employees’ support for this idea because ‘sacrifice’ implies something is being given up or lost. This is not the case: an exchange is taking place, value is not lost, and it is important this is realised.
A reduction in earnings means a reduction in national insurance (NI) payments and these savings can be used to provide benefits in a number of ways. If the employee and employer NI savings are added, the employer pension contribution could be up to 31% higher than receiving the salary and paying a personal contribution.
For higher rate taxpayers who opt for salary exchange, the increase in contribution would be lower (14.7%) but there would be the added benefit of tax relief at source.
3. Use input periods
Key points to be aware of include:
*
All registered pension schemes have a pension input period.
*
The pension input during a pension input period is compared to the annual allowance for the tax year when the period ends.
*
In a money purchase scheme, the member may choose to end the pension input period less than 12 months after the start.
Case study
Mary runs her own business. A pension plan commences on 15 March 2010 with a £245,000 employer contribution. Mary nominates to end the input period on 19 March 2010. The contribution is tested against the annual allowance for the tax year in which the input period ends (2009-10).
Mary’s second pension input period starts on 20 March 2010 and on that day her employer contributes £255,000, which is tested against the annual allowance for 2010-11. Mary nominates to end this second input period on 6 April 2010 (there must only be one input period end per arrangement in each tax year).
The third input period starts on 7 April 2010 and ends on 7 April 2011 (in 2011-12). Any contribution paid between these dates is tested against the 2011-12 annual allowance. It is therefore possible for Mary’s employer to pay another contribution on 7 April 2010 of £255,000.
This means £245,000 is paid on 15 March 2010, £255,000 a few days later on 20 March and £255,000 on 7 April, a total of £755,000 of company contributions in a matter of days. (The contributions need to be acceptable to the local inspector as ‘wholly and exclusively’ for employer tax relief to be given).
Anti-forestalling effect
Contributions of this level will not necessarily make sense if relevant income is more than £150,000 because anti-forestalling will bring a special annual allowance charge and a hefty personal tax bill.
However, if relevant income is less than £150,000 in the current and previous two tax years, then the anti-forestalling regulations will not apply. But remember, relevant income includes investment income, not just earnings from employment.
4. Carry back trading losses
Where a company makes pension contributions, valuable corporation tax relief can be secured, even when they are made during a loss-making accounting period.
Where pension contributions are allowable as a deduction against corporation tax, any trading loss can be set against profits from the previous year and, following the 2008 pre-Budget report and 2009 Budget announcement, the two years preceding that year. The ‘carry back’ relief extension means a tax refund can be received earlier.
*
Claims are possible for companies making returns for accounting periods between 24 November 2008 and 23 November 2010.
*
Losses are offset against the preceding year first and the amount able to be carried back to the first preceding year is unlimited.
*
A maximum of £50,000 of the balance of any unused losses can be carried back to the two earlier years.
Trading losses may also be carried forward to set against future profits. As long as the company paid corporation tax in the previous three accounting periods or will be paying it in subsequent periods, tax relief will be applied to pension contributions provided they are made wholly and exclusively for the purposes of the trade.
Consider reviewing cases in which a trading loss has been made between these dates to ensure this valuable planning opportunity is not overlooked.
5. Claim higher rate tax relief
Personal contributions to pension plans are often paid out of net pay and grossed up by basic rate tax relief. For higher rate taxpayers, the difference between higher and basic rate relief is reclaimable when completing a self-assessment tax return.
The difference between higher rate and basic rate can be claimed by completing and returning a self-assessment tax return. If members do not do this, they may not receive the tax saving that is due.
6. Contribute at least £20,000 (this year and next)
It is a good idea to remind clients of the cost of delaying pension contributions and the possible effects on future retirement provision.
Case study
(For illustrative purposes, assume a growth rate of 7% each year and an annual management charge of 1%)
John has relevant income of £200,000 for 2009-10. He is aged 50 and intends to take his pension benefits at age 65.
If he paid £20,000 gross in 2009-10 and 2010-11, these contributions could be worth £92,260 at age 65. The effective cost would be £22,000 (£20,000 less 40% tax relief plus £20,000 less 50% tax relief).
If payment is deferred until 2011-12, then using the same assumptions, a contribution of £40,000 could be worth £84,588 at age 65. The cost to John would be £32,000 (£40,000 less 20% tax relief).
John’s choice is to pay a total of £22,000 net over 2009-10 and 2010-11, or pay nearly £35,000 net in 2011-12 to achieve the same potential fund value at age 65.
7. Third party contributions
This offers considerable scope for inheritance tax (IHT) and pension planning with the advantage that a donor can gift money in their lifetime without any possibility of IHT (subject to surviving seven years) while making pension provision for future generations.
The value of the gift is enhanced by basic rate tax credit when it is paid into the pension plan. The donor does not need to worry about beneficiaries frittering away the monies because access to the funds is not normally available until age 55.
8. Manage relevant income
Anti-forestalling introduced a relevant income threshold of £150,000 (and a special annual allowance of £20,000). Anyone with lower relevant income is not affected by the rule changes. But even if this year’s income is less than £150,000, it may have been higher in either of the previous two tax years.
Assuming that relevant income for all three years is less than £150,000, there are a number of pension planning issues and opportunities:
*
Salary exchange will continue to be attractive as a means of reducing tax and NI contributions, for those with relevant income of less than £150,000.
*
Maximise personal contributions. Anyone with relevant income of less than £150,000 can pay up to 100% of their relevant UK earnings and get tax relief at their highest marginal rate.
* Let the employer make the contribution. Contributions from an employer are not normally added back in to the calculation of relevant income. So it is possible for relevant income to remain below £150,000 and employer contributions to be paid up to the annual allowance or even beyond.
9. Retain your personal allowance in 2010-11
If adjusted net income is more than £100,000, the basic personal allowance will be reduced or removed entirely. A pound of personal allowance will be lost for every £2 of income earned over £100,000. All personal allowance will be lost when earnings equal approximately £112,950 (assuming the current personal allowance), giving an effective 60% tax rate.
Adjusted net income is taxable income reduced by specified deductions (such as trading losses and payments made gross to pension schemes) as well as grossed-up gift aid and pension contributions that have received tax relief at source. Provided an individual’s adjusted net income is not more than £100,000, they will continue to be entitled to the full amount of the basic personal allowance.
Making a personal pension contribution would reduce adjusted net income, which not only reduces the higher rate tax liability, but could also mean retaining the full personal allowance and effective tax relief of up to 60%.
10. Bed and Sipp
Approved share option plans can be rolled over on maturity into a pension arrangement and deliver a tax relief top-up. It may also be possible to encash other types of assets and securities, and invest the proceeds into a pension plan that offers access to a wide range of investments, such as a self-invested personal pension (Sipp).
Basic rate tax relief is added to the contribution (which may help to offset any losses) and the original investment can then be replicated as far as possible in the pension plan.
Sheltering investments in a tax-favoured wrapper, such as a pension plan or ISA, can even help to reduce relevant income and avoid the possibility of the anti-forestalling provisions biting.
11. Carry back of gift aid
The final step of calculating relevant income under anti-forestalling deducts gift aid contributions. Potentially, gift aid contributions could reduce relevant income to less than £150,000 and thereby result in not being affected by anti-forestalling.
A donation, subject to gift aid, can be backdated to a previous year if a nomination is made on the self-assessment tax return for that year, ie, before it is submitted to HM Revenue & Customs (HMRC) by either the 31 October deadline for a paper return or the 31 January deadline for an online return.
This means provided the 2008-09 tax return has not yet been submitted, a claim can still be made by 31 January 2010. HMRC Form P810 Tax Review can be used for those who do not submit a self-assessment tax return; the deadline is still 31 January 2010.
12. Income recycling
While the government’s position on recycling tax-free cash is well known, no similar action has been taken against recycling income.
The recycled income is invested in an uncrystallised pension arrangement, offering additional tax-free cash and improved lump sum death benefits, which are not subject to 35% tax or (normally) IHT.
Provided the income is reinvested immediately, all other things being equal, the total fund invested should remain the same as if no income were taken (the tax relief cancels out the income tax). However, higher rate taxpayers must be aware of the tax relief time lag. They will not have full fund replacement unless they replace the marginal higher rate tax up front from other resources before claiming the relief later.
Income recycling could be particularly useful to those who are aged 50 or over, but under 55 on 6 April 2010, who want to access their benefits before then, rather than wait up to another five years.
Recycling income into a third party’s pension is also a useful estate-planning tool. Unlike personal income recycling, this option is even possible after the age of 75, and could be useful planning for someone concerned about death while in alternatively secured pension.
Note: This was written before the 9 December pre-Budget report.
Thursday 17 December 2009
The future of financial services - RDR
The FSA has published its latest consultation paper on the retail distribution review.
The key decisions in CP09/31 ‘Delivering the Retail Distribution Review’ are:
It has decided not to establish an independent professional standards board, preferring to use an ‘internal’ model that will see it work closely with existing professional standards bodies.
On qualifications it has published a list of qualifications from 13 insitutions that meet the transitional arrangements for the move to level four.
Protection has been kept out of RDR but the FSA says it will consult further on commission disclosure for pure protection products.
On group pensions it has developed a new concept called ‘consultancy charging’ to replace ‘arranger charging’.
The key decisions in CP09/31 ‘Delivering the Retail Distribution Review’ are:
It has decided not to establish an independent professional standards board, preferring to use an ‘internal’ model that will see it work closely with existing professional standards bodies.
On qualifications it has published a list of qualifications from 13 insitutions that meet the transitional arrangements for the move to level four.
Protection has been kept out of RDR but the FSA says it will consult further on commission disclosure for pure protection products.
On group pensions it has developed a new concept called ‘consultancy charging’ to replace ‘arranger charging’.
Tuesday 15 December 2009
IFAs rated the “most fair” by independent “Fairness Index”
IFAs rated the “most fair” by independent “Fairness Index” Earlier this year AIFA launched a policy paper on restoring consumer trust in financial services which included the findings of an independent ‘Trust Index’ compiled by the Financial Services Research Forum (FSRF). The annual ‘Trust Index’ is used to understand the influences on trust and benchmark the sectors within the industry, and provides a useful comparison of consumer perceptions and attitudes towards Financial Services Institutions (FSIs). Indeed the 2009 index showed IFAs were consistently the most trusted of all FSIs, both in terms of base level trust and higher level trust.
Friday 11 December 2009
Pre-Budget Report 2009
Pre-Budget Report 2009
With Government debt running to hundreds of billions, the Chancellor was unlikely to give much away. There was the introduction of further anti-avoidance provisions in a number of areas as well as a final prompt for individuals to disclose holdings in offshore accounts.
There was an interesting announcement relating to a reduction in Bingo Duty. However, on closer inspection this Duty was in fact increased in Budget 2009 from 15% to 22%, and is now being 'reduced' to 20% (Budget Notice 73 April Budget 2009). Similarly, the 0.5% increase to both employee and employer National Insurance (NI) announced today is in addition to a 0.5% increase already announced, which means that in 2011/12 NI levels for both employees and employers will increase by 1%.
There are some new green incentives being introduced. These include replacing your old boiler and selecting an electric car for your company car, as the Government continues to strive towards reducing our carbon footprint.
In a move that was widely anticipated, discretionary bonuses over £25,000 paid to bank employees will effectively be taxed twice. The intention is not to catch asset management companies by this measure, and employers will only be subject to a one-off 50% tax rate if they undertake 'banking activities'. VAT will revert back to its old level of 17.5% and the stamp duty holiday on property purchases will return to its previous threshold, both on 1 January 2010.
Personal allowances and thresholds have remained virtually unchanged based on the fact that the annual change in the Retail Prices Index was negative for September - the month used in legislation. The Basic State Pension, however, will be increased by 2.5% from April 2010 and certain benefits, such as Child Benefit, will increase by 1.5%.
Impact on financial planning
Key changes impacting financial planning focus on two areas: pensions and inheritance tax.
Pensions (Pre-Budget Report Notes 18 and 19)
Reduced relevant income threshold
The Chancellor announced that, from 6 April 2011, those with income over £130,000 will have employer pension contributions added to see if they are over the £150,000 income threshold that will trigger restrictions on higher-rate tax relief.
As a consequence, there will be an immediate increase in the number of individuals who will potentially have restricted relief on significant future pension accrual between 9 December 2009 and 5 April 2011.
Individuals whose relevant income (excluding employer contributions) exceeds £130,000 for the current tax year or two previous tax years will, from 9 December 2009, be subject to the same restrictive tax relief provisions that, since 22 April 2009, had applied to individuals with relevant income over £150,000.
Key elements are:• A special annual allowance of £20,000 will apply for the remainder of the 2009/10 tax year and the 2010/11 tax year.
• Any accrual made on or after 9 December 2009 that exceeds the special annual allowance and is not a protected pension input or within the higher infrequent money purchase contribution threshold will be subject to a special annual allowance charge of 20% in the current tax year.
• Accruals or contributions made in the current tax year up to 8 December 2009 will not subject any affected client to a special annual allowance charge. The value will, however, reduce or completely negate the special annual allowance the client has available.
• Annualised regular savings immediately preceding 9 December 2009 will be treated as a protected pension input, as will the infrequent money purchase contributions threshold based on the average of such payments over the 2006/07-2008/09 tax year period capped at £30,000.
• The same rules as applied on 22 April 2009 for the original anti-forestalling measures covering re-structuring of contributions to separate registered pension schemes will apply to individuals caught by the new threshold.
• Employer contributions resulting from any new salary sacrifice arrangements entered into from 9 December 2009 will be included in the relevant income definition for threshold testing.
The changes announced today will mean a need to revisit future planning for those individuals now brought into the more restrictive relevant income threshold definition. Accruals and contributions already received into schemes by close of business yesterday will be protected from any special annual allowance charge. The changes, however, may restrict future use of pension arrangements for these individuals.
Special annual allowance tax charge for the 2010/11 tax year
The level of charge applicable to excess contributions paid in the 2010/11 tax year will be a variable rate based on the underlying rate of income tax to which the individual is subject. The stated aim is to reduce the effective rate of relief to 20%, ie the basic rate. This will create a variable charge of between 0-30% depending on the income tax rate of the individual concerned.
Smaller companies corporation tax
The Pre-Budget Report announced a deferral of the proposed increase in the rate to 22% until April 2011. The rate will remain at 21% until then.
Short service refund lump sums
The Pre-Budget Report announced changes to be effective from the 2010/11 tax year. The tax charges that will apply are 20% for the first £20,000 of the refund and 50% on any excess above £20,000.
Employer-funded retirement benefit scheme (EFRBS) - scheme payments
Where certain lump sums, gratuities or other benefits are received from an EFRBS by an entity that is not an individual, the rate of tax paid by the recipient will increase from 40% to 50% effective from the beginning of the 2010/11 tax year.
Inheritance Tax (Pre-Budget Report Notes 20 and 21)
Pre-Budget Report Note 20 announced that the Finance Bill 2010 will set the limit of the inheritance tax (IHT) nil-rate band for the 2010/11 tax year at £325,000 - the same level as in 2009/10. The Finance Act 2007 currently provides that the nil-rate band will rise to £350,000 for 2010/11 and this announcement will stop the increase.
Pre-Budget Report Note 21 announced that legislation will be introduced in the 2010 Finance Bill to counter two tax avoidance schemes that have been designed to avoid IHT charges on property in trusts.
The measure will have effect for:
• transfers into a trust where the settlor retains a future interest, or where a future interest in a trust is purchased on or after 9 December 2009;
and
• interests purchased in trusts on or after 9 December 2009.
This measure will apply:
• where a person transfers property into a trust in which they (or their spouse or civil partner*) retain a future interest or where a person purchases a future interest in a trust. It provides that there will be a chargeable event for IHT purposes when the future interest comes to an end and the person becomes entitled to an actual interest under the trust. If that future interest is given away before the person becomes entitled to an actual interest, it may be immediately chargeable to IHT;
and
• where a person purchases an interest in possession in a trust at full value. It provides that such an interest will be treated as part of the purchaser's estate for IHT purposes. If the interest comes to an end during the purchaser's lifetime, there may be an immediate charge to IHT.
Draft legislation has been published and is available at:
http://www.hmrc.gov.uk/pbr2009/inheritance-tax-avoid-3770.pdf
It would appear from first reading that this draft legislation does not impact traditional Discounted Gift Trust (DGT) or Loan Trust arrangements. The Pre-Budget Report mentions a wider review of the use of trusts to avoid IHT charges, but no further detail is included at this stage.
Offshore disclosure
Legislation will be brought forward to ensure that those who fail to declare offshore tax liabilities will face the tough penalties attracted by deliberate tax evasion. There will also be a new requirement to notify HMRC when opening offshore bank accounts in certain jurisdictions, supported by a separate penalty regime. Evading tax offshore could result in combined penalties of up to 200 percent of the unpaid tax. Further details are expected to be announced on this.
Summary
Many of these proposed announcements will not happen for another year or two and with a general election looming some of these may even change again before their start date. Given the possibility of two Budgets next year, making use of the planning opportunities which exist today may well be a prudent approach.
I hope you find this summary useful. As ever, the need for advice on these issues will be critical for clients to fully understand the impact of the changes.
With Government debt running to hundreds of billions, the Chancellor was unlikely to give much away. There was the introduction of further anti-avoidance provisions in a number of areas as well as a final prompt for individuals to disclose holdings in offshore accounts.
There was an interesting announcement relating to a reduction in Bingo Duty. However, on closer inspection this Duty was in fact increased in Budget 2009 from 15% to 22%, and is now being 'reduced' to 20% (Budget Notice 73 April Budget 2009). Similarly, the 0.5% increase to both employee and employer National Insurance (NI) announced today is in addition to a 0.5% increase already announced, which means that in 2011/12 NI levels for both employees and employers will increase by 1%.
There are some new green incentives being introduced. These include replacing your old boiler and selecting an electric car for your company car, as the Government continues to strive towards reducing our carbon footprint.
In a move that was widely anticipated, discretionary bonuses over £25,000 paid to bank employees will effectively be taxed twice. The intention is not to catch asset management companies by this measure, and employers will only be subject to a one-off 50% tax rate if they undertake 'banking activities'. VAT will revert back to its old level of 17.5% and the stamp duty holiday on property purchases will return to its previous threshold, both on 1 January 2010.
Personal allowances and thresholds have remained virtually unchanged based on the fact that the annual change in the Retail Prices Index was negative for September - the month used in legislation. The Basic State Pension, however, will be increased by 2.5% from April 2010 and certain benefits, such as Child Benefit, will increase by 1.5%.
Impact on financial planning
Key changes impacting financial planning focus on two areas: pensions and inheritance tax.
Pensions (Pre-Budget Report Notes 18 and 19)
Reduced relevant income threshold
The Chancellor announced that, from 6 April 2011, those with income over £130,000 will have employer pension contributions added to see if they are over the £150,000 income threshold that will trigger restrictions on higher-rate tax relief.
As a consequence, there will be an immediate increase in the number of individuals who will potentially have restricted relief on significant future pension accrual between 9 December 2009 and 5 April 2011.
Individuals whose relevant income (excluding employer contributions) exceeds £130,000 for the current tax year or two previous tax years will, from 9 December 2009, be subject to the same restrictive tax relief provisions that, since 22 April 2009, had applied to individuals with relevant income over £150,000.
Key elements are:• A special annual allowance of £20,000 will apply for the remainder of the 2009/10 tax year and the 2010/11 tax year.
• Any accrual made on or after 9 December 2009 that exceeds the special annual allowance and is not a protected pension input or within the higher infrequent money purchase contribution threshold will be subject to a special annual allowance charge of 20% in the current tax year.
• Accruals or contributions made in the current tax year up to 8 December 2009 will not subject any affected client to a special annual allowance charge. The value will, however, reduce or completely negate the special annual allowance the client has available.
• Annualised regular savings immediately preceding 9 December 2009 will be treated as a protected pension input, as will the infrequent money purchase contributions threshold based on the average of such payments over the 2006/07-2008/09 tax year period capped at £30,000.
• The same rules as applied on 22 April 2009 for the original anti-forestalling measures covering re-structuring of contributions to separate registered pension schemes will apply to individuals caught by the new threshold.
• Employer contributions resulting from any new salary sacrifice arrangements entered into from 9 December 2009 will be included in the relevant income definition for threshold testing.
The changes announced today will mean a need to revisit future planning for those individuals now brought into the more restrictive relevant income threshold definition. Accruals and contributions already received into schemes by close of business yesterday will be protected from any special annual allowance charge. The changes, however, may restrict future use of pension arrangements for these individuals.
Special annual allowance tax charge for the 2010/11 tax year
The level of charge applicable to excess contributions paid in the 2010/11 tax year will be a variable rate based on the underlying rate of income tax to which the individual is subject. The stated aim is to reduce the effective rate of relief to 20%, ie the basic rate. This will create a variable charge of between 0-30% depending on the income tax rate of the individual concerned.
Smaller companies corporation tax
The Pre-Budget Report announced a deferral of the proposed increase in the rate to 22% until April 2011. The rate will remain at 21% until then.
Short service refund lump sums
The Pre-Budget Report announced changes to be effective from the 2010/11 tax year. The tax charges that will apply are 20% for the first £20,000 of the refund and 50% on any excess above £20,000.
Employer-funded retirement benefit scheme (EFRBS) - scheme payments
Where certain lump sums, gratuities or other benefits are received from an EFRBS by an entity that is not an individual, the rate of tax paid by the recipient will increase from 40% to 50% effective from the beginning of the 2010/11 tax year.
Inheritance Tax (Pre-Budget Report Notes 20 and 21)
Pre-Budget Report Note 20 announced that the Finance Bill 2010 will set the limit of the inheritance tax (IHT) nil-rate band for the 2010/11 tax year at £325,000 - the same level as in 2009/10. The Finance Act 2007 currently provides that the nil-rate band will rise to £350,000 for 2010/11 and this announcement will stop the increase.
Pre-Budget Report Note 21 announced that legislation will be introduced in the 2010 Finance Bill to counter two tax avoidance schemes that have been designed to avoid IHT charges on property in trusts.
The measure will have effect for:
• transfers into a trust where the settlor retains a future interest, or where a future interest in a trust is purchased on or after 9 December 2009;
and
• interests purchased in trusts on or after 9 December 2009.
This measure will apply:
• where a person transfers property into a trust in which they (or their spouse or civil partner*) retain a future interest or where a person purchases a future interest in a trust. It provides that there will be a chargeable event for IHT purposes when the future interest comes to an end and the person becomes entitled to an actual interest under the trust. If that future interest is given away before the person becomes entitled to an actual interest, it may be immediately chargeable to IHT;
and
• where a person purchases an interest in possession in a trust at full value. It provides that such an interest will be treated as part of the purchaser's estate for IHT purposes. If the interest comes to an end during the purchaser's lifetime, there may be an immediate charge to IHT.
Draft legislation has been published and is available at:
http://www.hmrc.gov.uk/pbr2009/inheritance-tax-avoid-3770.pdf
It would appear from first reading that this draft legislation does not impact traditional Discounted Gift Trust (DGT) or Loan Trust arrangements. The Pre-Budget Report mentions a wider review of the use of trusts to avoid IHT charges, but no further detail is included at this stage.
Offshore disclosure
Legislation will be brought forward to ensure that those who fail to declare offshore tax liabilities will face the tough penalties attracted by deliberate tax evasion. There will also be a new requirement to notify HMRC when opening offshore bank accounts in certain jurisdictions, supported by a separate penalty regime. Evading tax offshore could result in combined penalties of up to 200 percent of the unpaid tax. Further details are expected to be announced on this.
Summary
Many of these proposed announcements will not happen for another year or two and with a general election looming some of these may even change again before their start date. Given the possibility of two Budgets next year, making use of the planning opportunities which exist today may well be a prudent approach.
I hope you find this summary useful. As ever, the need for advice on these issues will be critical for clients to fully understand the impact of the changes.
Thursday 10 December 2009
Pension Annnuities
I believe the OMO really must be an automatic default for retiring individuals where they can receive good value for money on their retirement income. I also believe they should all be completing a health questionnaire where this would also improve individuals being eligible for enhanced annuities. Something as important as an individual’s income for the rest of their lives needs to be treated much more seriously that it currently is.
It also highlights the requirement for individuals reaching retirement to seek professional financial advice.
It also highlights the requirement for individuals reaching retirement to seek professional financial advice.
Pension Annuities
The latest figures from the ABI showed the OMO take-up rate fell to 34 per cent in the third quarter of 2009, compared with 37.5 per cent in the same period in 2008. According to the ABI, just 0.5 per cent, or 358 out of 73,562, of retiring investors who purchased an annuity from their existing pension company managed to buy an enhanced annuity, an income increased above the standard rate in recognition of reduced life expectancy. By comparison, 24 per cent of investors, 9,124 out of 38,050, who exercised the open market option secured an enhanced annuity.
Saturday 5 December 2009
At Retirement
Did you know...only 1 in 3 people seek independent advice at retirement. Annuities - many individuals missing out on the Open Market Option OMO - resulting in a lower guaranteed income for life!
At Retirement Planning
Retirement Pensions - the at retirement market is predicted to double to £30 Billion by 2012. It also could be the biggest scandal in financial services!
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